The biggest incentive trap is for the lowest wages. Those earning less than 15,000 euros a year do not pay any income tax at all. Instead, they make Para fiscal social security contributions. This flat tax, combined with the threat of losing benefits, creates a significant tax wedge for low-paid jobs, where the hardest-to-employ often start their careers.
The Proper Income Support
In order to facilitate the employment of low-paid workers, the SDP proposes income support, which allows a low-paid worker earning less than EUR 15 000 a year to receive a tax refund instead of a tax, which is paid in connection with the salary. Thus, the income tax could remain negative, in which case the additional income in hand encourages people to work even in low-paid jobs. Income support would not affect pay, which must be based on collective agreements, as before. An income tax credit of the income support type is used in the United States, for example.
Income support facilitates employment by reducing the tax wedge, especially for part-time work and mid-year workers. For low-income earners, the tax wedge is mainly due to tax-like social security contributions, which amount to about 30 per cent of gross wages, taking into account both employee and employer contributions. In particular, employee contributions have risen as their level has risen from around 6% to almost 10% over the last ten years. In 2020, salary-based social security contributions totaled EUR 28 billion, or 29 per cent of all taxes and parafiscal charges.
Average employee social insurance contributions
It is also a question of fairness, as income support is a means of targeting tax cuts to the lowest paid. They also receive less compensation for social security contributions: sickness benefits correspond to the basic level and retirement income to the national pension. The s corp tax calculator is used properly there.
How It Technically Works
Technically, income support can be implemented by changing the parameters of state taxation of income support. Another option would be, for example, a separate reduction in income support under the Income Tax Act. These options would therefore not affect, for example, municipal tax revenues. The amount of support can be adjusted according to the amount of the budget allocated to it. At its lowest, a few tens of millions of euros could be set aside for income support, but it could also be linked to a wider reduction in income tax of hundreds of millions of euros.
Income support is linked to the SDP’s social security reform, i.e. General Security, which also supports employment and growth. Income support does not directly affect housing support based on gross income. Instead, it allows more people to earn a living on pay, so fewer would have to resort to income support.